Some interesting data that I wanted to place here for future searchability.
Based on today's annuity rates, a 180k purchase price would turn into $2,918.13 per month for 5 years. That rate has the expenses of running the structured sale's trust baked into it. In total it returns $175,087.88. Our basis in the sale is 40% of the sale price. So only 60% of the monthly annuity payment represents capital gains, or $21,010.54 a year. If we are no longer working, that figure is low enough that we pay no capital gains tax, virtually no state tax (a few hundred dollars), and we're still well positioned for healthcare through the ACA.
In our case, taking the lump sum from a normal sale would cause 25k in long term capital gains tax and state tax combined. We would net 155k from the sale.
Here's how cfiresim compared the 5 year return on investing 155k now in 80/20 stocks/bonds w/ 0.08 expense fees to investing $35,017/year for 5 years in the same asset allocation (minus $430 in state tax "spending" per year).
| Lump Sum | 5-year annuity |
Lowest | 91,299 | 98,176 |
Highest | 443,788 | 362,277 |
Average | 220,777 | 210,129 |
Median | 219,514 | 205,911 |
The annuity is pretty close in performance to the lump sum investment. I thought this is particularly interesting in our current market environment, given that there has to be a pull back at some point. I'm sure more people are betting on the market under performing over the next 5 years than over performing. The structured sale option (annuity) would provide almost our entire planned expenditure (FIRE'd on $1 million liquid assuming a 40k spend) for the first 5 years of our retirement.
We haven't lived through a big market crash with significant funds invested. I think I wouldn't panic sell, but I don't have the experience to back that up. For the tiniest bit of sacrifice in performance I could potentially buy us a "don't care" card. If the market did crash in the first couple years, I would definitely be nervous about sequence of returns risk if I was spending down my portfolio. Since I would no longer be doing that I doubt I'll care about a crash because I know recoveries are fairly quick.
A structured sale seems like an interesting tool in the toolbox for a very narrow range of situations. I think that an early retiree selling a substantially appreciated asset could be a situation where it merits consideration. The one down side is that if we did earn significant income during the annuity period, we would likely end up paying all the same taxes that we would have on a lump sum sale. In that case the annuity's performance takes a considerable hit.